Private equity investment in 2017 is estimated to exceed USD 4 billion this year on the back of urban reforms such as the Real Estate (Regulation & Development) Act 2016 (RERA) and Real Estate Investment Trusts (REIT) listings. Revival of private equity investments in the residential sector is also expected this year, especially with regard to affordable housing, says a new report titled Decoding PE funds in Indian realty 2017.
Private equity investments into Indian real estate had almost stagnated between 2011 and 2014. However, with the NDA government assuming office in 2014 and the subsequent roll-out of a battery of reforms, there has been a paradigm shift in investors’ interest. From an average investment of USD 2.1 billion in 2011-14, capital flows rose by 57 percent to an average of USD 3.3 billion between 2015 and mid-September 2017.
It is pertinent to note that one major deal alone accounted for USD 1.8 billion. Gurugram attracted 56.4 percent of total investments in real estate due to one major GIC-DLF deal of USD 1,800 million followed by Mumbai (39.8 percent).
“The dominance of institutional funds in the private equity investments’ pie reflects long-term confidence in India’s strong economic fundamentals. In line with the change in the investors’ profile we have observed a dramatic shift in capital movement from the residential sector to pre-leased office and retail assets. However, we believe that investors would revisit the residential sector on the back of the reforms-driven new order with focus towards affordable housing projects,” said Dr Samantak Das, Chief Economist and National Director- Research, Knight Frank India.
Asset class-wise break-up
The share of private equity investments into residential projects nearly halved from 50 percent in 2011 to 28 percent in 2016 and further dropped to a meagre 4 percent in 2017.
The office market that accounted for 29 percent of PE funds in 2011 today stands at almost two-third (66 percent) of the investments into in the Indian real estate.
From a negligible number in 2011, PE investments in retail climbed to 19 percent in 2016 and sustained at 14 percent in 2017.
The share of warehousing in total investments nearly doubled from 9 percent in 2011 to 16 percent in 2017.
“The bias of large institutional investors to acquire high ticket and marquee leased out office and shopping centre assets at aggressive valuations indicates that they expect the current leasing demand for such assets across both categories to remain buoyant in the foreseeable future thereby putting upward bias on the lease rentals and the asset valuations in near future. Also, the exit barrier and therefore the liquidity risk perception in such assets is much lesser given that the creation of public markets in the form of REITS is just round the corner. In the residential sector, however, the private equity investors would continue to remain cautious with a majority of them waiting out for current consolidation cycle, driven by both the market and regulatory forces, to run its full course before they re-enter into that space,” says Rajeev Bairathi, Executive Director & Head, Capital Markets, Knight Frank India.
Origin and destination of funds
Majority of private equity investors in 2017 are domestic investors followed by investors from the US and Canada.
Singapore had the highest investment per deal on account of a single big ticket GIC-DLF deal of USD 1,800 million.
Changing investor’s profile
More than 80 percent of the PE capital contributors in 2017 were long-term sovereign and pension funds.
Pure private equity funds and real estate funds continue to show trust in residential assets.